UAL, Continental shareholders approve airline merger

This photo illustration made available on Aug. 11 by United Airlines and Continental Airlines shows changes to the visual branding for the new global airline. Continental and United shareholders approved the airline merger Friday, which will form the world's biggest airline Friday.

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September 17, 2010

By Associated Press

Shareholders of United and Continental airlines voted Friday to approve a combination of their companies that would create the world's biggest airline and could have far-reaching effects on where they fly and how much they charge passengers.

The companies expect the $3 billion stock swap to close in the next two weeks after tying up loose ends. Regulators in the U.S. and Europe have already signaled approval.

At both companies, the vote for the deal topped 98 percent.

With the voting over, the real work begins, including combining two separate groups of highly unionized workers, merging reservations systems and putting new paint jobs on the planes.

It likely will be some time before passengers notice much difference when they fly Continental or United. The companies expect it will be at least a year before federal authorities approve their request to fly as one airline, which will be called United and painted in Continental's colors.

Shareholders of United parent UAL Corp. will own 55 percent of the new company, to be called United Continental Holdings Inc. and based in United's hometown of Chicago. It will be led by Continental Airlines Inc. CEO Jeff Smisek.

The UAL acquisition of Continental will combine United's strength in the Midwest, the West Coast and across the Pacific with Continental's presence in Texas, the East Coast and routes to Europe and Latin America. The airlines hope that by forging a larger network, they will attract more top-dollar corporate travelers while reducing costs.

Smisek hinted at layoffs Friday, saying there will be overlapping jobs when the two combine, but he did not give any numbers.

There's also the matter of a lawsuit by several dozen passengers who claim that a United-Continental combination will lead to fewer flights and higher fares. A federal judge in San Francisco is scheduled to hear closing arguments Friday on a request to block the deal.

Even though United and Continental overlap on few routes, "losing a major competitor is likely to make prices rise — all things equal on the economy and fuel prices," said Rick Seaney, the CEO of FareCompare.com.

Seaney noted that when Delta Air Lines Inc. bought Northwest Airlines in 2008 — which made Delta the biggest airline, for a while — the combined company reduced the supply of seats on U.S. flights. He expects the same to happen when United and Continental completely merge their operations.

The companies say they compete with low-cost carriers on about three-fourths of their U.S. routes, which will help keep fares down.

Measured by traffic - the number of miles flown by paying customers - the new United would leapfrog Delta, Air France-KLM and American Airlines to become the world's biggest airline.

Size is no guarantee of profits in the airline business. UAL and Continental together lost nearly $7 billion in 2008 and 2009 due to high fuel costs and the recession. Both returned to profitably last quarter, as fees and higher fares boosted revenue.

The history of the airline industry has been littered with mergers that didn't work out as well as planned.

American Airlines parent AMR Corp. bought TWA during a recession in 2001. Within a few years, American had dropped TWA's St. Louis hub and furloughed most of the TWA workers. The 2005 deal to combine US Airways and America West is still plagued by animosity between the two labor groups.

Continental and United talked about a merger in 2008, but Continental — the smaller but more financially secure of the two — walked away from the table. Talks resumed this year after Delta's acquisition of Northwest seemed to go smoothly, creating a more powerful competitor.

UAL and Continental stock will continue to trade until the deal closes, at which time Continental shareholders will get 1.05 shares in the new United for each Continental share they owned.